“Every business model is, to some extent, an exercise in incentive and market design.”

Axel Ockenfels is one of Germany’s most renowned economists: Professor of Economics at the University of Cologne, Director at the Max Planck Institute for Behavioral Economics, Founding Director of the Adenauer School of Governance, and Principal Investigator at ECONtribute. His research focuses on behavioral economics and market design — and on one central question that is highly relevant for founders, companies and policymakers alike: How can we design markets, incentives and institutions in a way that helps solve real-world problems?

Interview Marc Kley

1. Professor Ockenfels, your work focuses on the design of markets and incentives. How can founders leverage your scientific insights when developing their business models?

Every business model is, to some extent, an exercise in incentive and market design, whether founders are aware of it or not. Whoever builds a platform, a pricing scheme or an app decides who can trade with whom, what information they see, and what incentives they face. Market design research offers three lessons for founders. First, details matter: seemingly minor rules can make or break a market. I have seen many systems fail because of seemingly innocuous design mistakes. Second, behavior matters: people reciprocate, care about fairness, are loss averse, and are quickly overwhelmed by complexity. Third, testing matters: experiments are the wind tunnel of market design and the gold standard for finding out what works and what does not. 

2. What advice would you give founders who want to build two-sided marketplaces to ensure both trust and liquidity on their platform?

Buyers only come if sellers are there, and vice versa. Successful platforms thus rarely launch both sides symmetrically. They often make the market “thick” in a niche first, often subsidizing the harder-to-attract side, and expand only once matches happen reliably. Trust deserves special attention, because it does not emerge automatically; it must be engineered. When we studied eBay’s old two-sided feedback system, we found that sellers could retaliate against negative ratings, so buyers stayed silent and ratings became inflated and uninformative. Redesigning the system so that honest feedback was safe restored its information value, and eBay changed its rules accordingly. Engineering trust is often no less important than engineering the product itself.

3. For young companies, trust is often the scarcest resource. What does behavioral economics tell us about how trust is built – and how it is destroyed?

Behavioral economics finds that most people are conditionally trustworthy: they cooperate if they expect others to cooperate, and they reciprocate both kindness and unkindness. Trust therefore grows in small steps, through repeated interaction, kept promises and reliability. And it may collapse quickly. A single breach can outweigh many positive experiences. It is therefore not advisable to rely on goodwill alone. Make commitments verifiable, offer guarantees, and fix errors quickly, transparently and fairly. 

4. In your opinion, which major societal challenge could be solved more effectively if we designed markets, platforms, and incentives more intelligently?

Almost any. Take climate change. It is often framed as a moral problem, but at its core it is a cooperation problem: everyone benefits if emissions fall, yet each country, company and individual prefers others to bear the cost. A uniform carbon price would steer billions of everyday decisions toward climate protection without micromanaging any of them. Not less importantly, our research shows that carbon pricing facilitates international negotiations built on reciprocity, which can stabilize cooperation where unilateral pledges fail. A similar logic creates value elsewhere: kidney exchange programs save lives, well-designed electricity markets keep the energy transition affordable, and clever matching systems allocate school places more fairly. Wherever incentives are misaligned, better economic design can unlock large social value.

5. Speaking of climate change, Gateway operates the focus center Climate Innovation.NRW. Green startups want to protect the climate but also need to be profitable. How do we create markets where sustainability almost “automatically” pays off for the individual company?

Sustainability pays off “automatically” when prices tell the economic and ecological truth. The single most important instrument is therefore a credible carbon price, perhaps complemented by border adjustment so that clean producers are not undercut by dirty imports. Then green business models no longer depend on moral appeals or permanent subsidies. Moreover, a carbon price is not only effective, it can also ease the burden of climate policy on poorer households because, unlike many other policies, it generates revenues that can be used to compensate those in need. 

6. You advise policymakers extensively on energy and climate issues. Where do you currently see the biggest market barriers for climate innovations in Germany?

The biggest barrier is uncertainty. Carbon prices differ across sectors and remain politically contested, and the future design of the electricity market is under discussion. Also, climate policy focuses too much on narrow, self-centered carbon-footprint goals, which do little to fight global climate change, and too little on incentivizing climate innovation. Innovation makes climate action cheaper, can align self-interest with climate protection, and can thus make a real difference in the world. 

7. What needs to change at universities to encourage more researchers to take the leap into practical application or spin-offs?

This is hard to say, because fundamental research is important, and it is often impossible to predict what will translate into practical application and what will not. And my own experience is that engaging with practice is not a distraction from research but often a source of it. Moreover, I suspect that the AI-accelerated transformation of the economy and society will make such translation ever more important. Knowledge is more readily available, so that the ability to contextualize it, apply it, and translate it into better decisions is becoming increasingly important. Accordingly, analytical judgment, the ability to learn, and the ability to solve complex problems under conditions of uncertainty and as part of a team are in high demand and, I suspect, will therefore play an increasing role in university culture and education. 

8. If you were to found a startup yourself today, which problem would you tackle – and what role would market design play?

I am now the founding director of the Adenauer School of Government, which at this stage is itself a kind of start-up. Our aim is to build a modern school with innovative teaching and research on public governance in a world shaped by technology and data. I cannot imagine a more rewarding task than bringing thoughtful academics, decision-makers and students together and letting something good emerge.

9. Which book or insight from behavioral economics or market design should every founder know before launching their first product?

Alvin Roth’s “Who Gets What – and Why”. No other book conveys the market designer’s mindset so well: markets are not natural phenomena but human artifacts whose rules can be engineered. As a second read, Daniel Kahneman’s “Thinking, Fast and Slow”, to understand people, your customers and yourself. Both books teach that markets and human behavior follow rules that can be understood – and improved.